View from City Road: Diverted by detail: An open letter to Sir Adrian Cadbury

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The Independent Online
Dear Sir Adrian,

I realise I have left it a bit late, but I would like to comment on what has become known as the Cadbury report (in recognition of the role you played as committee chairman). I have read some of the submissions you have received and believe that they, like your report, miss the point.

You once asked me if I had any suggestions for a name for your committee. You realised then that Corporate Governance was a turn-off. It is a pity you did not find another name - I admit I was little help - but you made your problems worse by calling it the committee on The Financial Aspects of Corporate Governance. You could not have chosen better had you wanted to kill your report stone dead.

Your committee has been diverted from its proper course. Corporate governance is about the way companies are run. This is a big subject and one that you, with your experience at the family chocolate firm, are qualified to write about. But not all of those on your committee are as well placed. Eminent though they are, few of them have any experience of managing companies.

You concentrated on micro-questions such as whether chief executives should double up as chairmen or whether executive directors should sit on committees that decide their pay. While splitting the top two jobs is a useful safeguard, and keeping executives out of discussions on their own pay packet is plain common sense, neither measure is essential to success. If they were, Marks and Spencer, where Sir Richard Greenbury is chairman and chief executive, would not be such an oustanding company.

You may have set out to improve the way companies are run, but what you ended up doing was adding to their burdens by requiring extra disclosure and board committees. These costs may be worth paying, but it is wrong to require change of companies without doing the same of shareholders too.

You say: 'The issue for corporate governance is how to strengthen the accountability of boards of directors to shareholders.' But I think you should have said: 'The issue is whether shareholders have a role in improving the way companies are run and, if they do, how they can help out.'

Few shareholders know how to run ICI better than Sir Denys Henderson, or Courtaulds Textiles better than Martin Taylor. They do not want their jobs.

They do, however, want them to do better, which is not necessarily a criticism of how they are doing now. Shareholders and managers have a shared interest in a company improving its performance. Shareholders benefit when companies do.

This explains why the subject has been so popular in recent months. Against the background of recession, companies are failing and, out of self-interest, shareholders wonder if there is anything they can do to help.

Large investors - the pension funds, insurance companies and unit trusts - could do far more. For a start, their managers could turn up to annual meetings. Airing their criticism or praise in public is likely to have far greater effect on companies than doing so in private. Why did you not make attendance a key recommendation?

Much the same applies to voting. While some insurance companies vote on all issues, other large shareholders tend to express their approval or otherwise by buying or selling shares. Your encouragement to vote is welcome, but far from sufficient. You recommend that companies should make a statement on whether they comply with your code of practice: did you consider whether fund managers should, too?

You put far too much weight on board structures and not enough on other factors that also influence a company's performance. What about requiring companies to disclose how much they spend on training? Or the qualifications of their top managers? These are every bit as important as the composition of audit committees.

Your recommendations on auditors, especially on strengthening their independence, were most interesting, but they only address one aspect of the way companies are run.

Perhaps my expectations of your report were too high. Perhaps its failure to address the broad issue is significant: it may be that shareholders can do little to contribute to corporate performance over the long run.

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